Hedge Funds Lose Two Billion on Apple

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Imagine losing US$2 billion overnight?

A couple of hedge funds are still coming to grips with this reality.

And it’s all because of old reliable.

You’ve probably seen the news already. The safe and reliable Apple Inc. [NASDAQ:AAPL] has fallen. The stock is now down more than 35% from its high in 2018.

Maybe you yourself are an Apple shareholder. And you’re wondering what the hell has happened.

Investors jumped into Apple because they thought it was big and safe.

The media tells us they’ve got a loyal band of customers. Looking at Apple’s chart history (before the drop) might also encourage you to buy. Overtime, old reliable always seems to go up.

Even Warren Buffett is on the bull’s side. He’s buying as much Apple as he can get his hands on. The oracle isn’t always right. But he’s rarely wrong whenever he loads up on a particular stock.

So, why is Apple falling?

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Why is Apple falling

Apple is an easy pick. Or at least, it was.

It’s the most popular international buy among Aussie investors.

Older Aussie investors see Apple as a ‘“safe” growth share,’ says Matt Leibowitz from share-trading platform Stake.

Apple was the number one international stock bought by Aussies 55 years and over. It was also the second choice for those under 35.

But that could all change if the stock keeps falling.

In a letter to shareholders last week, Apple said sales will be substantially lower for the up-coming quarter. Apple’s Tim Cook chalks it up to a dramatic slowdown in Chinese sales.

Reported by the Australian Financial Review:

Lachlan MacGregor of funds management firm Alphinity Investments said that given the iPhone was the “world’s largest consumer product”, an unexpected slowdown in sales had widespread ramifications.

“Apple is telling us that consumers, particularly in greater China, are spending less. Taken with other weaker economic metrics out of China, this has to lead to investors being more bearish on the region generally and on consumer spending specifically,” he said.

Mr MacGregor said it was not clear whether consumer spending was slowing in developed markets, as the weakness focused on China and other emerging markets.

“But this sort of news doesn’t make you more bullish, and could have a flow-on impact to other areas.”

After the press release, at least six research firms reduced their target price on Apple.

Yet you could argue that these changes are just noise. Taking advice from Wall Street, who only cares about how much you trade, is never a smart move.

But with more pain potentially coming for China in 2019, investors are down on Apple. And the hedge funds aren’t happy.


Source: Bloomberg

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Mr Buffett’s position is down close to US$21 billion from where it was just a few months ago.

Surely this is just a temporary slump? Old reliable will rise again, right?

Why Microsoft is more reliable than Apple

Maybe this is just a temporary speed bump.

Maybe Chinese sales will rocket after we see the end of this trade war. Maybe Apple is old reliable and it just needs time to shake off market pessimism.

One quarter is not reflective of Apple’s earnings power, after all.

Yet in the last year I’ve grown more and more sour towards the stock.

I used to think Apple was an amazing company. A company that could grow sales and earnings, regardless of background macro factors. They have massive pools of cash on the balance sheet.

There was, and some would say there still is, a lot to like about Apple.

But maybe Apple’s success was the doing of a few key moments. The rest could be attributed to an ever-expanding industry — that of smartphones, smart watches and apps.

Apple might not be the wonderful business we all think it is. They’re the beneficiaries of booming industries that are only now starting to mature.

And it’s because Apple tries to do everything (which they are still doing to an extent) that turns me off the stock.

Look at Microsoft Corp. [NASDAQ:MSFT] as a comparison. Microsoft grows sales and earnings at an incredibly reliable rate. They also dominate one product category — software.

Their market share in PC operating systems hasn’t dropped below 80% in the last five years.

And Apple continues to compete with Microsoft in PC software.

Another focused example is Intel Corporation [NASDAQ:INTC]. They are the company when it comes to making processors. What makes Intel so dominant is not really their patents but their size and relationship with customers.

Intel controls so much of the market that they can spend multiples more on development and advertising compared to their competitors.

It wasn’t that long ago that Apple was also competing against Intel. Then, Apple realised they couldn’t outdo Intel. So, they now use Intel processors in their devices.

It’s also why Apple now allows users to use Windows on their Mac’s. Most people use Windows. It creates a network effect. And so many Apple users want to use Windows on their Macs.

Even smartphones are proving more challenging to dominate. The global share for smartphones is split between Samsung, Apple and Huawei.

No single one has been able to maintain market share of more than 25% since 2009. Even in the US, Apple is not the dominant smartphone.

So much for customer loyalty.

So where has all Apple’s growth come from, then?

I think it has a lot to do with the booming industries Apple jumps into. Volumes rise initially because demand is overwhelming.

But as volumes start to level out, Apple needs to come up with a new way to grow. You could argue they’ve recently done that through higher prices.

The future for Apple

This is not to say Apple will crash and burn. They have products and infrastructure that make them important competitors in the smartphone, mobile OS and app ecosystems.

But Apple’s earnings tomorrow might be much lower than they are today.

If it’s easy for Samsung to come in and grab 20% of the smartphone market, who’s to say another big tech firm can’t do the same?

Apple is now far from a trillion-dollar company.

The stock may bounce back up.

But I don’t believe they’ll have a bright future, especially if they continue to try and do everything.

Your friend,

Harje Ronngard,
Editor, Money Morning

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